Bitter pill for landlord on lease renewal – rent free period included in new rent
Commercial landlords and tenants should take note of the recent decision in (1) Old Street Retail Trustee (Jersey) 1 Ltd and (2) Old Street Retail Trustee (Jersey) 2 Limited v GB Healthcare Limited, a recent County Court lease renewal case that addresses inter alia the assessment of rent pursuant to s. 34 of the Landlord and Tenant Act 1954.
The proceedings concerned premises at 199 Old Street occupied by a pharmacy. The parties were agreed as to most of the terms and the parties’ surveyors had agreed the level of interim rent. The main question, and perhaps the most interesting aspect of the decision, concerned the determination of the rent payable under the new lease.
The position under s. 34 of the 1954 Act is that the new rent is payable from day one of the lease. The question that invariably flows from this is whether the new rent ought to be reduced to account for the absence of a rent-free period, which would normally be granted in the open market for the tenant’s fit out and/or to provide an incentive. This is an area of debate on which there is no binding authority.
The court decided that a deduction from the new rent should be made to reflect a notional six-month rent-free period. This was justified on the basis of a purposive construction of s. 34(1)(a), whose aim was said to be “to ensure that the rent payable reflects the real market value of the subject property in a hypothetical transaction where the landlord is willing and the tenant is not a sitting tenant, and has no connection to the property.” Having regard to actual market practice, that led to the new rent being calculated at £144 psf, which included a deduction for the economic impact of COVID-19 and, as is often the case, happened to be roughly in the middle of the surveyors’ respective valuations.
While the decision is not binding, having been made at first instance, it aligns with five other decisions made at County Court level, and therefore perhaps can be taken as illustrative of a tendential line of judicial thought, of which parties wishing to conclude renewals by agreement ought to be mindful. That being the case, the decision of the court as to the construction of s. 34 differs from that of the most recent County Court judgment addressing this question so, until the point is dealt with by a higher court, the manner in which it will be determined in renewal proceedings will continue to attract uncertainty.
The full judgment can be read here.
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